Question

Classical economic theory treats unions as monopolies that create inefficiencies in the economy. Explain and illustrate with drawing how these inefficiencies are created in both the labour and product markets.

Answer 1

Trade Unions Organization Provides Joint Representation With Employers For Workers. There are many functions in the organization of the economy :

1.) Representation of workers about salary and conditions of work.

2.) Coordinating with firms to implement new work practicability and interaction with workers.

3.) With the possibility of going on strike, higher wages should be taken at the rate of doing transactions on good wages.

Trades Unions in a Competitive Labour Market :

in this fig. , we can show that,

In a competitive labor market, wages were W1. If a trade union successfully bargains for a higher wage of W2, then employment falls to Q2

This situation can lead to real wage unemployment in Q3-Q2.

That is why economists believe that labor markets are competitive, they say there can be inefficiency and unemployment in labor unions.
So labor unions can increase wages for members, but those outside the union are more likely to experience unemployment.

A competitive labor market is one where there are many potential employers for a given type of worker, say a secretary or an accountant. Suppose there is only one employer in the labor market. Because that employer has no direct competition in hiring, if they offer lower wages than would exist in a competitive market, employees will have few options. If they want a job, they must accept the offered wage rate. Since the employer is exploiting its market power, we call the firm a monopsony.

Inefficiency is created in the product market :

Under certain circumstances, market economy firms may fail to produce efficiently. Inefficiency means that scarce resources are not being utilized optimally. In economics, the concept of inefficiency can be applied in many different situations.

1.) The demand for product markets mainly comes from households.

2.)Demand for goods is direct demand. Good is purchased for its internal use.

3.) It facilitates the exchange of goods and services in a market economy. It is based on voluntary transactions at various locations.

Product markets rely on the operation of supply and demand to determine prices :

Iin the above fig. We can show that, In this case, an increase in demand can lead to an increase in the price of the product.

Example.of product market :

• Farmer’s market selling vegetables direct to the public
• Fish market
• Supermarkets selling a range of goods in a convenient place.
• Amazon.com – Offering the direct sale of goods, and marketplaces for intermediaries
• Ebay.com – Offering individuals the opportunity to sell goods.   

The above things show how economic theory treats unions as monopolies that create inefficiencies in the economy.